Solution-Build a 2-period tree of stock prices

Build a 2-period tree of stock prices

Assignment Help Finance Basics

Reference no: EM133056031

A non-dividend paying stock, currently priced at 140, is expected to go up by 10% or go down by 10% over a period. The risk-free rate for one period is 4%.

a) Build a 2-period tree of stock prices.

b) Price a call option with a strike of $120 using the binomial pricing model.

c) Calculate and explain the hedge ratio that makes risk-neutral pricing possible. Demonstrate the value of the hedge portfolio for shorting 1000 call options currently (at the beginning of the tree) and both when the stock price goes up and goes down (once).

d) How does the hedge ratio change and how many shares do you need to buy/sell to stay hedged in point u?

Reference no: EM133056031

Questions Cloud

What is? rogot pre-tax? wacc : Rogot Instruments makes fine? violins, violas, and cellos. It has $1.1 million in debt? outstanding, equity valued at $2.5 ?million, and pays corporate income t

What is the project npv-temple corp : Temple Corp. is considering a new project whose data are shown below. The equipment that would be used for 4-year, would be depreciated by the straight-line met

Calculate how much a person must deposit : Calculate how much a person must deposit in a financial institution to contract a pension for his ex-wife for one of the following two options

Forecast on the market risk premium : PKG Labs is a leading pathology provider and its shares are listed on the Australian Stock Exchange. In the year just ended, PKG Lab's net income was $15 millio

Build a 2-period tree of stock prices : A non-dividend paying stock, currently priced at 140, is expected to go up by 10% or go down by 10% over a period. The risk-free rate for one period is 4%.

Compute the traditional payback period : Question - Compute the traditional payback period (PB) and the discounted payback period (DPB) for a project that costs $329,000

World of fixed-income security : Why T-bills or T bonds are important in the world of fixed-income security?

Calculate the market value of equity and market value : WestCo Ltd (WTC) is a publicly traded company with a current share price of $33 per share and had 14 million shares outstanding.

Compute the value of a convertible bond : Compute the value of a convertible bond. This is all that was provided in the guide

User Account

All Pages

Build a 2-period tree of stock prices

Reference no: EM133056031

Reference no: EM133056031

Questions Cloud

Reviews

Write a Review

Finance Basics Questions & Answers

Financial reporting and analysis

A report on financial accounting

Describe the types of financial ratios

Differences between sole proprietorship and corporation

Prepare a cash budget statement

What are the implied interest rates

State pricing theory and no-arbitrage pricing theory

Small business administration

Effect of financial leverage

Evaluate the basis for the payment to the lender

Importance of opps, ipps, mpfs and dmepos

Time value of money

Assured A++ Grade

Academics

Major Subjects

Majors

Get In Touch

TERMS & POLICIES

HELP & SUPPORT